Journal of Business Research 58 (2005) 726 – 735

The entrepreneur’s business model: toward a unified perspective
Michael Morrisa,*, Minet Schindehutteb, Jeffrey Allenc

Witting Chair in Entrepreneurship, Syracuse University, Syracuse, NY 13244, USA b Miami University, Oxford, OH 45056, USA c University of Central Florida, Orlando, FL 32816, USA Received 29 September 2002; accepted 6 November 2003

Abstract Highly emphasized in entrepreneurial practice, business models have received limited attention from researchers. No consensus exists regarding the definition, nature, structure, and evolution of business models. Still, the business model holds promise as a unifying unit of analysis that can facilitate theory development in entrepreneurship. This article synthesizes the literature and draws conclusions regarding a number of these core issues. Theoretical underpinnings of a firm’s business model are explored. A six-component framework is proposed for characterizing a business model, regardless of venture type. These components are applied at three different levels. The framework is illustrated using a successful mainstream company. Suggestions are made regarding the manner in which business models might be expected to emerge and evolve over time. D 2003 Elsevier Inc. All rights reserved.
Keywords: Activity sets; Architecture; Business model; Strategy; Model dynamics

1. Introduction Ventures fail despite the presence of market opportunities, novel business ideas, adequate resources, and talented entrepreneurs. A possible cause is the underlying model driving the business. Surprisingly, little attention has been given to business models by researchers, with much of the published work focusing on Internet-based models. The available research tends to be descriptive in nature, examining approaches to model construction, noting standard model types, citing examples of failed and successful models, and discussing the need for new models as conditions change. Yet, no consensus exists regarding the definition or nature of a model, and there has been no attempt to prioritize critical research questions or establish research streams relating to models. The purpose of this study is to review existing perspectives and propose an integrative framework for characterizing the entrepreneur’s business model.

2. Literature review 2.1. What is a ‘business model’? No generally accepted definition of the term ‘‘business model’’ has emerged. Diversity in the available definitions poses substantive challenges for delimiting the nature and components of a model and determining what constitutes a good model. It also leads to confusion in terminology, as business model, strategy, business concept, revenue model, and economic model are often used interchangeably. Moreover, the business model has been referred to as architecture, design, pattern, plan, method, assumption, and statement. It is possible to bring order to the various perspectives. A content analysis of key words in 30 definitions led the authors to identify three general categories of definitions based on their principal emphasis. These categories can be labeled economic, operational, and strategic, with each comprised of a unique set of decision variables. They represent a hierarchy in that the perspective becomes more comprehensive as one progressively moves from the economic to the operational to the strategic levels. At the most rudimentary level, the business model is defined solely in terms of the firm’s economic model. The

* Corresponding author. Tel.: +1-315-443-3164. E-mail address: (M. Morris). 0148-2963/$ – see front matter D 2003 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2003.11.001

it is not an activity set. and decisions related to economics. products. This lack of consensus has hindered progress on a number of related issues. Accordingly.326. ways in which models interact with organizational variables. Stewart and Zhao (2000) approach the model as ‘‘a statement of how a firm will make money and sustain its profit stream over time. administrative processes. manufacturing. partner network/ roles (7). and networks and alliances. and logistical streams. vision. and firm for ‘‘business model.. Walgreen) suggests that the elements making these models unique transcend the architecture of the firm or how it makes money.’’ The largest volume of research has come from electronic commerce (Mahadevan. pricing methodologies. a firm that has grown to over US$32 billion in annual sales in just 20 years. consider Dell Computer. and value offering.’’ At the operational level.2.812 and 2387 entries. Nucor. As it became evident that the number of potential models was limitless. IKEA.’’ Among the available definitions. an analysis of models frequently cited as being well conceptualized (e. Similarly. Morris et al. and economics are addressed to create sustainable competitive advantage in defined markets. systems built to order. knowledge management. values. Few insights are available regarding the conditions that make a particular model appropriate. A notable exception can be found in Amit and Zott (2001). Decision elements include stakeholder identification. The company’s products include a mix of PCs. Results from these two sources indicated 4. a time period associated with the ‘‘new economy. Adherence to these elements guides operational decision making and the firm’s ongoing strategic direction. Some items overlap. the Dell business model integrates strategic considerations. / Journal of Business Research 58 (2005) 726–735 727 concern is with the logic of profit generation. The focus is on internal processes and design of infrastructure that enables the firm to create value. and software products.g. among other questions. speedy integration of new technologies. operational processes. Attempts at model decomposition acknowledge the existence of interdependencies among components but shed little light on the nature of the relationships. 2. interactions across organizational boundaries. and a highly efficient procurement. the model represents an architectural configuration.’’ The popularity of the term is evidenced in a keyword search using the Google search engine and the ABI-Inform database. What do we know about business models? Interest in business models is relatively recent.’’ Definitions at the strategic level emphasize overall direction in the firm’s market positioning. Early work focused on capturing revenue streams for web-based firms. although activity sets support each element of a model. the following integrative definition is proposed: ‘‘A business model is a concise representation of how an interrelated set of decision variables in the areas of venture strategy. 2000). It is not a strategy but includes a number of strategy elements. and dynamics of model evolution. Limited progress has also been made in establishing methodologies for evaluating model quality.html. However. internal infrastructure/connected activities (6). The number of components mentioned varies from four to eight. cost structures. It captures key components of a business plan. Hence. moderate margins. with much of the research appearing in the past decade. servers. defines the tasks it will perform itself and those it will outsource. among other variables. In spite of this foundation. Slywotsky (1996) refers to ‘‘the totality of how a company selects its customers. highly responsive customer service. For a detailed inventory of these models. The perspectives are notable both for their similarities and differences. differentiation. Subsequent efforts identified model types based on product offerings. workstations. and expected volumes. rapid inventory turnover. A total of 24 different items are mentioned as possible components. The business model is related to a number of other managerial concepts. Decision variables include production or service delivery methods. with 15 receiving multiple mentions. architecture. Of concern is competitive advantage and sustainability. Table 1 presents a synopsis of available perspectives regarding model components. see http://digitalenterprise. respectively. progress in the field has been hindered by lack of consensus over the key components of a model. Relevant decision variables include revenue sources. strategic elements are most prominent. Mayo and Brown (1999) refer to ‘‘the design of key interdependent systems that create and sustain a competitive business. existence of generic model types. Further. notebooks. and distribution process. the model captures the essence of how the business system will be focused. Theoretical underpinnings of business models Issues of theory represent another area receiving scant attention.3. such as customer relationships and the firm’s partner network or the firm’s revenue sources. Dell. 2.M. and growth opportunities. goes to market. customer interface/relationship (8). economic model (10). but the plan deals with a number of start-up and operational issues that transcend the model. value creation. creates utility for customers and captures profits. More than the sum of its parts. value-creating processes. Their business concept involves selling customized computer solutions directly to customers at competitive prices. resource flows. defines and differentiates its offerings.’’ To illustrate the distinction between a business model and related concepts. researchers began focusing on model taxonomies. It is designed around elimination of intermediaries. The most frequently cited are the firm’s value offering (11). who approach the business model construct as a unifying unit of analysis that captures value creation . margins. and target markets (5). configures its resources. WalMart.

infrastructure et al. and sustainability Weill and Vitale (2001) Strategic objectives. revenues. the model relates to strategic network theory (Jarillo. revenue sources. customer relationship. 1999) and relates to transaction cost economics (Williamson. revenue. revenue model. vertical integration. and financial aspects Donath (1999) Customer understanding. and IT infrastructure Applegate (2001) Concept. partners. and competitive strategy Gartner (2003) Market offering. and determine how the firm fits into the value creation network. capital model. Here. distribution. value ports. and technology Rayport and Value cluster. processes. business actors and roles. connected activities. actor benefits. organizational form. organizational characteristics. Internet-enabled commerce relationship. and linkages Timmers (1998) Product/service/information flow architecture. They argue for a crosstheoretical perspective. capabilities. business units. price. strategic resources. Further. core technology investments.. management must consider the firm’s value proposition. resource system. 1981). marketing tactics. revenue model. infrastructure management.legalities. commerce process model. Most directly. sales. Positioning within the larger value network can be a critical factor in value creation. market segments. competitive strategy) about firm boundaries (Barney. 1985) and the extended notions of value systems and strategic positioning (Porter. target markets. and technology Viscio and Pasternak (1996) Global core. and financial aspects Afuah and Tucci (2001) Customer value. stakeholder network. / Journal of Business Research 58 (2005) 726–735 Table 1 Perspectives on business model components Source Horowitz (1996) Specific components Number E-commerce/ general 5 5 5 G G E Empirical Nature of data support (Y/N) N N Y Detailed case studies Price. while transaction cost economics identifies transaction efficiency and boundary decisions as a value source. and market model Dubosson-Torbay Products. competencies. 1995) and cooperative strategies (Dyer and Singh. channel model. Morris et al. Most perspectives on models include the firm’s offerings and activities undertaken to produce them. value network. choose the activities it will undertake within the firm. concluding that no single theory can fully explain the value creation potential of a venture. services. core competencies. value activity. revenue sources. implementation. transaction structure. value interfaces. cost structure and profit model. it builds upon the value chain concept (Porter. corporate governance.728 M. and customers. internal value chain Rosenbaum (2000) structure. (2001) Value model. and bottom line Hamel (2001) Core strategy. market space offering. 2001). resource model. and intranet/extranet capabilities Gordijn et al. channels. 1996). and customer interface Petrovic et al. . the firm must establish appropriate relationships with suppliers. success factors. In terms of the firm’s fit within the larger value creation network. Jaworski (2001) and financial model Betz (2002) Resources. it also draws on resource-based theory (Barney et al. customer segments. As part of its positioning. and value exchanges Linder and Cantrell (2001) Pricing model. The business model construct builds upon central ideas in business strategy and its associated theoretical traditions. value is created from unique combinations of resources that produce innovations. profits. and marketing strategy Markides (1999) Product innovation. capabilities. value network.. value offering. Based on Schumpeter’s (1936) theory of economic development. product. the model involves choices (e. 1998).g. structure. and capital 4 5 8 G E E N N N 8 G Y 70 interviews with CEOs 35 case studies 6 G Y 4 4 7 E G E N N N Consulting clients Consulting clients 4 8 8 E E E Y N Y Detailed case studies Survey research 3 4 6 4 4 G E E E G N Y N Y N 59 case studies Literature synthesis 100 cases arising from multiple sources. production model. and value proposition Chesbrough and Value proposition. (2001) Actors. and transaction governance Alt and Zimmerman (2001) Mission. value proposition. (2001) and network of partners. Because the business model encompasses competitive advantage. scope. governance. and value Amit and Zott (2001) Transaction content. customer relations model. customer relationship.

a well-formulated model must address six key questions (see Table 2). The need for three levels reflects the different managerial purposes of a model. Accordingly. and how the firm makes money.1. Morris et al. the firm’s role in production or service delivery. The economics of the venture is featured prominently in business model research. and their interaction 3. six basic decision areas are considered. the theory of effectuation suggests that entrepreneurs make conjectures about the future. necessitating a third level in the model. internal processes and competencies. determine what can be done.1. Foundation level: defining basic components At its essence. their geographic dispersion.. comprehensive. Business models will differ for ventures with more moderate versus more ambitious aspirations. including those summarized in Table 1. Let us examine each in more detail. a need to make generic decisions regarding what the business is and is not and ensure such decisions are internally consistent. / Journal of Business Research 58 (2005) 726–735 729 Models implicitly or explicitly address the internal competencies that underlie a firm’s competitive advantage. Aspirations reflect the firm’s relationship to the entrepreneur’s career and life and influence enterprise objectives. measurable. ‘proprietary. where the model has proprietary innovative elements. How will the firm create value? This first question concerns the value offering of the firm. Moreover. it permits general comparisons across ventures and the identification of universal models. and operationally meaningful. Its inclusion in the model is supported by the work of Afuah and Tucci (2001). the model’s purpose is to enable development of unique combinations among decision variables that result in marketplace advantage. it is possible to develop a standard framework for characterizing a business model. Also. 2000). where the firm is viewed as a bundle of resources and capabilities (Barney et al.. This is consistent with resource-based theory.2. An additional theoretical perspective approaches the business model as interrelated components of a system that constitutes the firm’s architectural backbone. a competitive strategy element has been added. At the proprietary level. the customer. With systems theory. Alternatively. in turn producing superior returns to the firm. termed the ‘foundation’. reflecting the design considerations necessary to accommodate differing levels of growth. The rules level delineates guiding principles governing execution of decisions made at levels one and two. Competitive advantage can emerge from superior execution of particular activities within the firm’s internal value chain. 3. the business is viewed as an open system with varying levels of combinatorial complexity among subsystems and bounded by the environment and open information exchange (Petrovic et al. unless it provides specific guidance and discipline to business operations.’ and ‘rules’ levels. logical. a useable framework should apply to all types of ventures. with its emphasis on role of an entrepreneur’s cognitive capabilities and skills assessment in determining outcomes. and exit vehicles. The most consistently emphasized components concern the value proposition. the sixth decision area captures growth and time objectives of the entrepreneur.1. at each level. 2002). In seeking generalizability. Thus. At this level. reflecting the need to translate core competencies and the value proposition into a sustainable marketplace position. 2001). Finally. time horizons. the framework becomes a customizable tool that encourages the entrepreneur to focus on how value can be created in each of the six decision areas. To whom will the firm sell and where in the value chain will it operate? Customer types. the extant perspectives tend to oversimplify a firm’s model. Model development: an integrative framework Building on these conceptual and theoretical roots. These questions have been derived based on commonalities among the various perspectives found in the literature. each has a foundation in the theoretical work discussed earlier. There is. such a framework must be reasonably simple. and how the offering is made available to customers. Because the foundation level addresses basic decisions that all entrepreneurs must make. Chesbrough and Rosenbaum (2002). or superior management of the interface between the firm and others in the value network. Further. resource advantage theory holds relevance (Hunt. 3. Decisions here address the nature of the product/ service mix. To be useful. resource strategies. To these four. 3. dation level. At the same time. 1936).M. the growth and profit aspirations of entrepreneurs vary considerably. The usefulness of any model is limited. and goals emerge over time (Wiltbank and Sarasvathy. consistent with Schumpeterian theory (Schumpeter. Various theoretical traditions have implications for entrepreneurial intentions regarding the nature and scope of the venture. however. superior coordination among those activities. and the creation of value provides a justification for the business entity. For whom will the firm create value? This question focuses on the nature and scope of the market in which the firm competes. 2001). a framework is proposed that consists of three increasingly specific levels of decision making.1. The challenge is to produce a framework that is applicable to firms in general but which serves the needs of the individual entrepreneur. at the foun- . An effective model encompasses unique combinations that result in superior value creation. among others. Self-efficacy theory is a case in point. There is no business without a defined value proposition. and Rayport and Jaworski (2001).

the entrepreneur invests to the point that the business is able to generate on ongoing and stable income stream for the principals. These competencies lie at the heart of the business model (Applegate. offering: internal manufacturing or service delivery/ outsourcing/ licensing/ reselling/ value added reselling . ranging from lifestyle firms to rapid growth companies. innovation leadership . The economic model provides a consistent logic for earning profits. Siggelkow. 2001. 2000). product or service quality/selection/features/availability . The challenge is to identify salient points of difference that can be maintained.4. defensible niche enabling the firm to mitigate ongoing developments in the environment. 2002). resource management. the firm’s ability to achieve relatively higher or lower margins. 1999.’ Examples of four such models are subsistence.g. offering: broad line/medium breadth/narrow line . local/regional/national/international .1. supply chain management . . and speculation. margins: high/medium/low Component 6 (personal/investor factors): What are our time. subsistence model .1. What are the entrepreneur’s time. volumes: high/medium/low . Development and enhancement of this competency solidify the firm’s role in the external value chain and become the focus for the internal value chain. production/operating systems . pricing and revenue sources: fixed/mixed/flexible . 2001). and size ambitions? (select one) . the entrepreneur seeks a positioning basis that is more than transitory. 3. income. an integrated business model must capture the entrepreneur’s time. with general sources of advantage identified by various observers (e. financial transactions/arbitrage . its resource requirements. type of organization: b-to-b/b-to-c/ both . offering: direct distribution/indirect distribution (if indirect: single or multichannel) Component 2 (market factors): Who do we create value for? (select from each set) . A firm can attempt to build advantage around one or more competencies. and the firm’s revenue model. broad or general market/multiple segment/niche market . low cost/efficiency . How will the firm make money? A core element of the firm’s business model is its economic model (Linder and Cantrell. image of operational excellence/consistency/dependability/speed .1. offering: primarily products/primarily services/heavy mix . Viscio and Pasternack. As such. 1998. offering: access to product/ product itself/ product bundled with other firm’s product .5. offering: deep lines/medium depth/shallow lines . the goal is to survive and meet basic financial obligations. where customer is in value chain: upstream supplier/ downstream supplier/ government/ institutional/ wholesaler/ retailer/ service provider/ final consumer . firm architecture. income model . and Timmers. technology/R&D/creative or innovative capability/intellectual . It can be approached in terms of four subcomponents: operating leverage or the extent to which the cost structure is dominated by fixed versus variable costs. When employing an income model. 3. growth model . The entrepreneur attempts to define a unique. offering: standardized/some customization/high customization . transactional/relational Component 3 (internal capability factors): What is our source of competence? (select one or more) . What is the firm’s internal source of advantage? The term ‘core competency’ is used to capture an internal capability or skill set that the firm performs relatively better than others (Hamel. Given the ability of firms to quickly imitate one another. 2001). scope.3. creation of internal competencies. scope. growth. 3. selling/marketing . With the subsistence model.. Federal Express delivers a benefit of on-time delivery based on its competency at logistics management. scope. Morris et al. networking/resource leveraging Component 4 (competitive strategy factors): How do we competitively position ourselves? (select one or more) . and economic performance. 2001.1. Markides. and the organization is configured around this competency. operating leverage: high/medium/low . intimate customer relationship/experience Component 5 (economic factors): How we make money? (select from each set) . and what it sells.730 M. / Journal of Business Research 58 (2005) 726–735 Table 2 Six questions that underlie a business model Component 1 (factors related to the offering): How do we create value? (select from each set) . Support for the role of customer considerations in delineating a firm’s model can be found in Gordijn et al. including the flexibility of revenue sources and prices. speculative model 3. Differences among venture types have important implications for competitive strategy. and size ambitions or what might be termed the firm’s ‘investment model. the firm’s emphasis on higher or lower volumes in terms of both the market opportunity and internal capacity. How will the firm position itself in the marketplace? Core internal competencies provide the basis for external positioning.. Failure to adequately define the market is a key factor associated with venture failure. The model must delineate how the entrepreneur intends to achieve advantage over competitors (Amit and Zott. A growth model finds significant requirements have significant impacts on how an organization is configured. information management/mining/packaging . and size ambitions? Entrepreneurs create different types of ventures. 1996).6. Hence.

the entrepreneur’s time frame is shorter and the objective is to demonstrate venture potential before selling out. / Journal of Business Research 58 (2005) 726–735 731 initial investment.M. high-frequency. less congested airports of large cities Innovative ground operations approach Independent baggage handling system Use of Boeing 737 aircraft No code sharing with other airlines Differentiation is achieved by stressing on-time arrival. In a speculative model. as it entails innovation unique Table 3 Characterizing the business model of Southwest Airlines Foundation level Component 1: Factors related to offering Sell services only Standardized offering Narrow breadth Shallow lines Sell the service by itself Internal service delivery Direct distribution to a particular venture. the ‘Dell Direct Method’ results from proprietary approaches to defining the value proposition and organizing internal logistical flows.3. Replication is especially difficult because of interactions among the proprietary-level components. passengers having a good time (spirit of fun) Airline that love built Short-haul routes and high frequency of flights combined with consistently low prices and internal efficiencies result in annual profitability regardless of industry trends Emphasis on growth opportunities that are consistent with business model At least 20 departures per day from airport Maximum flight distance should be less than ___ miles Maximum flight time should be less than ___ minutes Turnaround of flights should be 20 minutes or fewer Component 4: Image of operational excellence/ Competitive strategy consistency/dependability factors Component 5: Economic factors Fixed revenue source High operating leverage High volumes Low margins Growth model Achieve best on-time record in industry Maintain cost per passenger mile below US$___ Component 6: Growth/exit factors Managed rate of growth . no advance purchase requirement Managed evolution from regional airline to servicing to 59 airports in 30 states Careful selection of cities based on fit with underlying operating model Rules Maximum one-way fare should not exceed US$___ Maximum food cost per person should be less than US$___ Component 2: Market factors B2C and B2B (sell to individual travelers and corporate travel departments) National Retail Broad market Transactional Production/operating systems Specific guidelines for selecting cities to be serviced 85% penetration of local markets Component 3: Internal capability factors Highly selective hiring of employees that fit profile. Eisenhardt and Sull (2001) discuss the concept of ‘‘strategy as simple rules’’ (see also Nelson and Winter.2. the proprietary level is not. They discuss ‘‘priority rules’’ that determine how Intel allocates manufacturing capacity and ‘‘boundary Proprietary level Short haul. Rules level: establishing guiding principles Once implemented. a model’s success can be tied to a basic set of operating rules. 1982). the entrepreneur identifies novel ways to approach such decisions. but also substantial reinvestment in an attempt to grow the value of the firm to the point that it eventually generates a major capital gain for investors. point-to-point service Deliver fun Serve only drinks/snacks Assign no seats/no first class Do not use travel agents/intermediaries Fully refundable fares. In the earlier Dell Computer example. low fares. the proprietary level becomes strategy specific. Proprietary level: creating unique combinations While the foundation level is adequate to capture the essence of a model for many firms. 3. low-fare. These guidelines ensure that the model’s foundation and proprietary elements are reflected in ongoing strategic actions. Where the foundation level is generic. Having determined that the firm will sell some combination of goods directly to businesses or will sell in consumer markets at high margins and low volumes. The foundation level model is fairly easy to replicate by competitors. This is referred to as the proprietary level of the model. 3. Morris et al. Fly into uncongested airports of small cities. intense focus on frontline employees Do not operate a hub and-spoke route system. sustainable advantage ultimately depends on the ability of the entrepreneur to apply unique approaches to one or more of the foundation components.

The proprietary model centers on Southwest’s core competency. 3. Adaptability may require models with loosely fitting elements or introduction of new elements that change the dynamics among existing elements. while reinforcing the strategic intent of the firm in the minds of employees.g. From Table 3. at the proprietary level. may require a cost structure with lower operating leverage and a customer focus that is not predicated on long-term customer relationships. The issue of fit Sustainability requires that model components demonstrate consistency. Ultimately.. the firm’s investment model effectively delimits decisions made in all the other areas. While each is vital. none of these firms has achieved the level of success as Southwest. However. while reflecting an approach that is difficult to replicate.732 M. the Southwest model is first captured at the foundation level. it would be easy to deviate from this model given competitive and regulatory pressures. employee policies. 4. this may imply a value proposition that centers on medium to low quality. Business model fit. a critical part of the firm’s business model. a number of ‘rules’ help management avoid strategic or tactical moves that are inconsistent with the model. With the lifestyle venture. This operating system (e. as opposed to how. moderate volumes.g. ‘‘fit. it can be seen how the model components are exploited for advantage in an innovative yet internally consistent manner. Companies must work to disrupt their own advantages and those of competitors. if one is building a lifestyle business. Consistency can be described in terms of both internal and external . the firm is apt to have a more narrowly defined product and market focus. direct service that is on-time and ‘fun’).. JetBlue. the model may require adaptation or wholesale change. Rindova and Kotha (2001) describe the ‘‘morphing’’ of Yahoo’s business model from provider of search functions to supplier of content to source of interactive services. the Southwest model has been copied in whole or part by others (e. / Journal of Business Research 58 (2005) 726–735 rules’’ that govern the types of movies Miramax decides to make. and fixed revenue sources may. and is likely to require an economic model that includes lower volumes.’’ where the former is concerned with a coherent configuration of key activities within the firm and the latter addresses the appropriateness of the configuration given external environmental conditions. When confronting highly turbulent conditions. External fit is concerned with consistency between choices in the six areas of the model and conditions in the external environment. This level is concerned with basics of the firm’s approach in terms of a standardized set of questions. Applying the framework Southwest Airlines has a robust business model that has sustained company growth for 30 years. In Table 3. A process of experimentation may be involved as the model emerges (and a viable model may never emerge). low margins. Rules are important at the level of execution of the business model. RyanAir. independent baggage handling. may be more dependent on customer relationships. A given economic model might not be workable when selling in a regional b-to-b market where significant investment in customer relationships is required or when selling a value offering involving extensive customization. evolution. Emergence and evolution of models Although some entrepreneurs have a clearly formulated model when undertaking a venture. its unique operating system. a rule might involve turning inventory in 4 days or less. Southwest’s superiority in exploiting this model also makes it clear that a wellconceptualized business model affects and is affected by such organizational variables as culture and leadership quality. airport and route selection. lowfare. Rules regarding maximum fares or flight turnaround times effectively delimit appropriate courses of management action. as in the Southwest example. United Express). be untenable. no code sharing. competitive positioning based on cost leadership. Consistent adherence to basic principles can distinguish two companies having otherwise similar models. For instance. a target market that is fairly broad and relatively price elastic. Internal fit includes both consistency and reinforcement within and between the six subcomponents of the model. and a growth-oriented investment model. An economic model with high operating leverage. with its shorter time horizon. the economics must fit with the other components of the model. standardization of aircraft) makes possible a unique value proposition (short haul. If the economic model calls for penetration pricing with low margins and high fixed costs. While some have achieved achieve noteworthy performance.2. Finally. Further. Here. including the aftermath of the 9/11 terrorist tragedy that devastated the industry. Morris et al. it may not be necessary to invest as much in the model’s proprietary elements. At Dell Computer. Alternatively. Not surprisingly. each component affects and is affected by the other components. many start with partially formed models and incomplete strategies. a speculative business.4. by itself. Next. a strong internal fit can undermine the firm’s adaptability in the face of a poor external fit. the focus is on what the firm is doing. Lessons 4.1. Girotto and Rivkin (2000) explain how Yahoo! adheres to a set of guiding rules in the formation of partnerships. Southwest’s model reflects innovation that has changed the ways in which other airlines operate. As environmental conditions change. especially in head-to-head competition with the firm. sustainability 4.

Implied in this work is a large universe of potential core elements from which a subset is created and elaborated upon as a firm evolves. it typically cannot be recalibrated. He juxtaposes strategy against operational effectiveness. Alternatively. as the firm has little experience. the model might call for internal manufacturing. and (d) ensure consistency between elements of strategy. furthering its advantage. truly unique configurations are produced that can result in sustainable advantage. such as how much inventory must move at certain times of the year.. Activity systems can be mapped so as to capture the evolution of organizations along discernable developmental paths. When external changes undermine a model. He/she might develop a set of rules of thumb that support the basic model. An initial period during which the model is fairly informal or implicit is followed by a process of trial and error. highlighting the importance of entrepreneurial vision. and deletion. As competencies are developed. Unfortunately. Central to Porter’s (1996) recent work is the concept of ‘‘activity sets. Linking the business model to strategic management concepts The business model is consistent with a number of emerging concepts from the field of strategic management. adaptation. Model evolution can also be linked to the type of venture being pursued. (b) seek complementary relationships among elements through unique combinations. and the model may never develop beyond basic decisions at the foundation level. The model is a relatively simple way to delimit and organize key decisions that must be made at the outset of a venture. In terms of the proposed framework. growth. Initially. comprehensive.g. The business model organizes these core elements and activities around six key decision areas. At the foundation level. Siggelkow (2002) characterized such adjustments in terms of augmentation. reinforcement. . Subsequently. Similarly. The business model represents a framework for doing this constructing in the early stages of a venture and for conducting predictive. the model provides a framework for deciding what not to do (e. and potent model is needed to provide direction and attract resources to a high growth venture. it is able to flesh out more components at the proprietary level. formal model is in place. Siggelkow (2002) characterizes activity sets in terms of core elements. Decisions at the proprietary level become vital for sustainable advantage. Morris et al. Grove (1997) describes ‘‘strategic inflection points’’ in the respecification of Intel’s model over time. a firm’s model might be expected to evolve from the foundation level toward a more complete articulation of the proprietary and rules levels. what-if scenario analysis. although more than one core element can fall into a given decision area. This entrepreneur may periodically deviate from the model. Conceptually. architecture. and a number of core decisions are made that delimit the directions in which the firm can evolve. a fairly definitive. For early stage entrepreneurs. adjustments are made and ongoing experiments are undertaken. The business model makes the choices explicit. (c) develop activity sets around a logical framework. For instance. where production processes are fairly similar to those of competitors and the firm’s competitiveness in this area is a function of operational effectiveness. As the firm develops and learns. with advantage deriving from how activities fit with and reinforce one another. it is possible to envision a business model life cycle involving periods of specification. Further. elaborating elements. introducing elements that are inconsistent with existing elements. and uniqueness. in Porter’s (1996) view. He notes the emergence over time of seven core elements in his study of the Vanguard Group. a new model must be constructed. and reformulation. Models for survival. The business model encourages the entrepreneur to (a) conceptualize the venture as an interrelated set of strategic choices. many of the potentially most productive activity sets are less apparent. growth. and exit intentions. At some point. economics. The model captures all of a firm’s core elements. the entrepreneur may have a fair picture of the foundation level and limited notions about some components at the proprietary level. sophistication. and speculative ventures might be expected to vary in formality. each of the six decision areas and the interactions between areas are supported by a variety of activity sets. lifestyle. the proprietor of a lifestyle business may have an implicit model in mind at start-up. keener insights may result regarding sources of innovation or advantage as they relate to those competencies. and develops rules that guide operations and ongoing growth. At the proprietary level.’’ Organizations configure activities in unique ways.M. For instance. a concern with performing similar activities better than competitors. 4. Strategic choices that characterize a venture are made both intentionally and by default. reflecting Porter’s (1996) notion of strategy. the mapping referred to by Porter and Siggelkow (2001) occurs after the fact. what services not to offer) and assists the entrepreneur in assessing consistencies and recognizing trade-offs among decisions. A basically sound model will typically withstand economic downturns and modest disturbances but can become dysfunctional if major discontinuities occur. / Journal of Business Research 58 (2005) 726–735 733 are being learned regarding what is required to make money on a sustainable basis. refinement. Strategy. The entrepreneur is also likely to become more strategic in his/her view of business operations over time. and interactions. The business model has elements of both strategy and operational effectiveness. is about performing differ- ent activities than competitors or about performing similar activities in different ways. Hence. a more formal. a low-cost advantage deriving from a novel approach to distribution might be central to the way in which the firm creates value.3. revision.

Mayo MC. Building a competitive business model. 2000. With the proposed framework. 22(2):493 – 520. classification and measurements. State College (PA): Institute for the Study of Business Markets. The role of the business model in capturing value from innovation (working paper). Also promising is the ability to identify model archetypes. Markides C. Strategic business models. New avenues for empirical research become possible. Sull D. Ketchen D. 2000. The real value of VARS: resellers lead a movement to a new service and support. Dyer J. Eisenhardt KM. A further step involves determining how the relative importance of component innovation varies depending on industry or market By applying codes to the various decision choices across the six components of the framework at the foundation level. Jarillo JC. Oxford: Butterworth-Heinemann. Linder JC. 2003. . Brown GS.16(4):31 – 6. A beginning point is to develop measures of model innovativeness. where the importance of fit will likely differ by activity area. Available at: http://www3. 2000. Van Vliet J. Wright M. Finally. Zott C. At the proprietary level.14(1):21 – 7. Girotto J. ISBM business marketing web consortium 3 (1). Other areas requiring further investigation include the ability of entrepreneurs and others to assess model quality. Thunderbird Int Bus Rev 2001. Business models for Internet-based e-commerce. Boston: Harvard Business School Press. E-business model design. Gordijn J. Thousand Oaks (CA): Sage Publications. Donath R. Conclusions The business model can be a central construct in entrepreneurship research. The proposed framework allows the user to design. Nelson R. Additional research is needed regarding what constitutes a rule. each of six components is evaluated at three levels. Introduction to special section on business models. describe. A dynamic view of strategy. Systematic approaches for assessing model viability are needed.16(4):11 – 7. The relational view: cooperative strategy and sources of interorganizational competitive advantage. Harvard Bus Rev 2001. Winter SG. Designing and evaluating e-business models. the framework enhances the ability to assess model attributes. Eng Manag J 2002. Changing business models. 2001. Tucci CL. critique. Boston (MA): Harvard Business School Press. Hamel G. Morris et al. Acad Manage Rev 1998. The resource-based view of the firm: ten years after. 2000. A general theory of competition. Amit R. IEEE Intell Syst 2001. The model becomes a form of intellectual property. At the foundation level.44(1): 5 – 23. Barney J. Mahadevan B. 1999. Grove A. especially when supported by a set or rules or guidelines that derive from decisions made at the proprietary level.40(3): 55 – 63. Gartner. differences between rules and objectives. Barney JB. qualities of good rules. Zimmerman HD. New York: McGraw-Hill/ Irwin. Strateg Manage J 2001. the model is defined in terms of a standardized set of decisions that can be quantified. just as critical are issues surrounding model implementation. Value creation in e-business. Chicago: Institute for Strategic Change. Sloan Manage Rev 1999.734 M. 79(1):79 – 87. How firm capabilities affect boundary decisions.27(6):625 – 41. while inconsistency can manifest itself both in terms of the fit among decision areas within a given component as well as the fit between components. The Schumpeterian tradeoff. Dubosson-Torbay M. Harvard Bus Rev 2001. and ways in which rules become dysfunctional. / Journal of Business Research 58 (2005) 726–735 5. This article has sought to provide direction in addressing some of the more vexing questions surrounding models.11(1):3 – 9. Strategy as simple rules. and analyze a business model for any type of company. Applegate LM. Internet business models. The model represents a strategic framework for conceptualizing a value-based venture. Boston: Harvard Business School.40(1):19 – 32. with some entrepreneurs actually obtaining patents for their models. Ivey Bus J 1999. Rosenbaum RS. Pigneur Y. Emerging e-business models. Betz F. J Manage 2001. 23(4):660 – 79. statistical tools can be used to identify dominant patterns among decision choices. It provides a useful backdrop for strategically adapting fundamental elements of a business. Only the paranoid survive. A benefit of this standardization is the ability to make comparisons across models from a broad universe of ventures. Taming e-business models. Chesbrough H. Calif Manage Rev 2000. By specifying the elements that constitute a model. 1995. types of rules. Accenture. Considerable work remains to properly understand business model innovation. Electron Mark 2001. Akkermans J. Singh H. 1 – 24. References Afuah A. categorize. A model that ignores one or more of the specified components will suffer in terms of its comprehensiveness. Another challenge involves experimenting with new strategic moves in ways that do not compromise the model. considerable scope for innovation exists within each model component. Strategic networks. Methods are also needed for appraising the model’s fit with changing environmental conditions. The business model can serve as a focusing device for entrepreneurs and employees. 1997. Leading the revolution.gartner. ranging from the creation of general model taxonomies and investigations of relationships among the foundation level variables to modeling relationships between the model and a host of endogenous and exogenous variables. Osterwalder A. Alt R. Yahoo! Case 9-700-013.42(4):55 – 69. 2001. Mark Comput 1996.63(3):18 – 23. 79(1):107 – 16. Am Econ Rev 1982. Rivkin J. New York: HarperCollins Business. Hunt SD. Rules provide a clearer sense of the firm’s value proposition and are a source of guidance regarding actions that might compromise the value equation. 72(1):114 – 33. Horowitz AS. further insights are needed into the dynamics of model emergence and evolution. Sloan Manage Rev 1999. Cantrell S. One challenge concerns the translation of model components into operational decisions.

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